Financial liberalization in developing countries

This article shows that higher interest rates increase the extent of financial intermediation while increased financial intermediation raises the rate of economic growth. Further, increases in interest rates have favorable effects on investment efficiency and on economic growth. It is noted, however, that excessively high interest rates will have unfavorable economic effects. Such a situation can be avoided if the liberalization of the banking system takes place under conditions of monetary stability accompanied by the government supervision of banks. Bela Balassa has been professor of political economy at the Johns Hopkins University and consultant at the World Bank since 1966. His recent books includeNew Directions in the World Economy (Macmillan, 1989) andComparative Advantage, Trade Policy and Economic Development (Harvester Wheatsheaf, 1989).